Jan. 1 (Bloomberg) -- The pound was the strongest performer
among a gauge of 10 developed-nation currencies in the second
half of 2013 as improved economic data boosted bets the Bank of
England will tighten monetary policy.

Sterling matched the highest level in more than two years
versus the dollar yesterday after third-quarter growth came in
at the fastest since 2010, spurring trader speculation the BOE
will raise interest rates earlier than its 2016 forecast. The
pound’s gains countered its biggest quarterly drop since 2008 in
the three months through March amid concern the economy was
headed for an unprecedented triple-dip recession.

“The turning point for the pound was the economic data,”
said Kathleen Brooks, European research director at Forex.Com in
London in a Dec. 23 interview. “U.K. data surprised to the
upside for most of the third quarter and parts of the fourth. It
can be a very powerful driver when the market believes the Bank
of England has got it wrong and is maybe behind the curve.”

The pound traded at $1.6578 at 4:51 p.m. London time
yesterday, matching the highest level on Dec. 27, which was the
strongest since August 2011. Sterling tumbled to as low as
$1.4814 on July 9, the least since June 2010. The pound traded
at 83.11 pence per euro after appreciating 3.3 percent in the
past six months versus the shared currency.

Rates Pledge

Central bank Governor Mark Carney, who took up his post in
July, pledged in August to keep the main interest rate at 0.5
percent at least until U.K. unemployment falls to 7 percent,
subject to caveats on inflation and financial stability.

The Bank of England raised its forecasts last month and
said the recovery had “taken hold” after the economy expanded
0.8 percent in the third quarter. The U.K. returned to growth in
the first three months of the year after shrinking in the final
two quarters of 2012.

Unemployment unexpectedly fell in the three months through
October to the lowest in more than four years, approaching the
BOE’s 7 percent threshold. That came after Citigroup Inc’s U.K.
economic surprise index rose to 113.30 on Aug. 19, the highest
level since October 2012.

The Monetary Policy Committee voted 9-0 to keep stimulus on
hold, minutes of its Dec. 4-5 meeting showed. The MPC said that
while sterling’s strength may help ease inflation pressures, it
could also impede growth in an environment of weak global
demand.

Sterling rose 6.8 percent in the past six months, the best
performer among 10 developed-nation currencies tracked by
Bloomberg Correlation Weighted Indexes. The euro rose 3.4
percent and the dollar dropped 3 percent. The pound dropped 6.5
percent versus the dollar in the first quarter, the worst
performance since the final three months of 2008.

Decline Forecast

The pound will decline against the dollar and appreciate
versus the euro next year, according to surveys by Bloomberg
News. It will drop to $1.59 by the end of 2014, according to the
median estimate of analysts. Sterling will strengthen to 81
pence versus the euro, another survey showed.

U.K. rates may need to rise as soon as next year, according
to interest-rate futures. The implied yield on short-sterling
futures expiring in December 2014, a gauge of where traders
think three-month interbank borrowing costs will be, was at
0.925 percent.

Yields on U.K. benchmark 10-year gilts were at 3.02 percent
after touching 3.08 percent on Dec. 27, the highest level since
July 2011. That’s up from 1.83 percent on Dec. 31, 2012.

Gilt yields rose this year with Treasuries as signs of a
strengthening U.K. recovery were mirrored in the U.S. and as
speculation the Federal Reserve would slow its bond-buying
stimulus program damped demand for fixed-income assets. The Fed
decided to trim its monthly purchases by $10 billion to $75
billion on Dec. 18.

“On the current trajectory it still looks most likely that
the Bank of England may be the first major central bank to begin
raising policy rates,” Lee Hardman, a foreign-exchange
strategist at Bank of Tokyo-Mitsubishi UFJ in London, said in a
Dec. 23 interview. “As a result, yield spreads should continue
to move in favor of the pound.”